Inavesting.com – The Canadian dollar has lagged other pro-cyclical currencies since early May, driven by its relationship with US economic data and Federal Reserve rate expectations. Market analysts are forecasting a 25 basis point rate cut by the Bank of Canada in June, a position that has held for several months. These expected policy actions are expected to reduce the Canadian dollar’s attractiveness relative to other commodity-linked currencies.
Inflation’s proximity to target was the main argument in support of a potential rate cut in June. However, a surge in job creation in Canada in April defied peace-loving forecasts. Today’s release of April Canadian Consumer Price Index (CPI) data is critical as it could impact market expectations for the June interest rate decision. Analysts are particularly interested in whether the benchmark CPI “cut” will match the Bank of Canada’s preferred measure of core inflation, the “median” falling below 3%. If all key inflation indicators, both core and headline, fall within the 1-3% target range, it could make it difficult for the Bank of Canada to make the case for maintaining contractionary monetary policy.
The market appears to be underestimating the likelihood of a rate cut in June, as only an 11 basis point adjustment is priced in. There is also speculation that the Canadian dollar could weaken further as a potential rate cut becomes more anticipated by the market, leading to increased dovishness on the Canadian interest rate curve. If inflation eases as expected based on today’s data, the pair could move back towards the 1.3700 level in the near future. Currency pairs such as and can also more clearly reflect policy differences.
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